Hedge funds: the dream of every aspiring financier (or at least, most of them).

And when the market tanks and companies start failing left and right, distressed hedge funds become even shinier and more attractive than plain vanilla hedge funds.

But since they’re so secretive, it’s also hard to find much information on breaking in, what you do day-to-day, and the pay and exit opportunities.

That changes today with part 1 of an interview from a reader who started out at a boutique investment bank, and then made the switch to distressed hedge fund.

Here’s what you’ll learn, and how you can make that same leap:

How to get network your way into hedge funds and impress headhunters.

How to prepare for interviews and the key questions you’ll have to answer.

What types of people hedge funds are looking for – Ex-bankers? CFA Charterholders? Former strippers?

How to spin yourself into sounding relevant even when you have no experience investing using the same strategies.

Storytelling

Q: Let’s start with your story and how you first got interested in hedge funds.

A: Sure. Right out of undergraduate I worked at an M&A boutique, but after about half a year I wanted to move to the buy-side for all the normal reasons: more interesting work, a better lifestyle (theoretically, anyway), and so on.

I went through the usual recruiting firms: Oxbridge, SG Partners, and CPI, which are the 3 most well-known firms for private equity recruitment, at least in the US.

Q: Wait, I thought you wanted to get into a hedge fund from the start. What happened?

A: At first I wasn’t sure of what I was doing, so I flailed around looking for any exit opportunity that was available.

That was a huge mistake when dealing with headhunters – specificity is key.

If you walk in there and say, “Oh, I want to do PE… or maybe go to a hedge fund… or maybe do venture capital,” they’ll just say, “Oh, well maybe I want to ignore you and look at people who know what they want.”

Now, you might be able to pull this off if you’re in one of the top groups (GS TMT and so on) and have a great pedigree, but if you’re a normal person it won’t work.

So I screwed up some early approaches by not coming across well in those initial interactions.

Eventually I decided that I wanted to focus on firms that did value investing, which includes many hedge funds across all strategies, and which can include PE as well.

I had done a part-time internship at a really small fund back in university, so I used that in my story and talked about how I enjoyed the fundamental analysis there and how I made my own investment decisions based on value investing criteria.

Q: OK, so once you had your story and goals figured out, you then went back to the same set of headhunters and said you were interested in value investing firms and distressed investing in particular?

A: No, not exactly – I never specified that I wanted to do distressed investing. I just mentioned “value investing”; I had never even worked with distressed securities, so I’m still not sure how I got the interviews.

I spoke with around 7 – 8 headhunters and also went through quite a few private equity interviews at first – partially to sharpen my interview skills.

But I realized along the way that I really didn’t want to do PE, because most of the growth equity firms that I interviewed with made associates do a ton of sourcing (i.e. cold calling companies all day long in search of the next Google or Facebook).

Once I figured out my story and what I really wanted to do, I shifted to hedge fund interviews and was much more specific with headhunters.

The 3 firms I mentioned above – Oxbridge, CPI, and SG Partners – all do a fair amount of hedge fund recruiting, but Dynamics Search Partners is a key one for hedge funds as well.

Q: So you reached out to all these places, or had friends refer you, and then you started interviewing with more hedge funds as you figured out your story.

But how did you explain your interest in distressed investing if you had nothing relevant on your resume?

A: I linked my interest to my own personal trading, where I made all decisions based on value investing principles, and also to that part-time HF internship I did in university.

I was upfront with the funds I interviewed at and told them, “I’ll be honest with you – I haven’t dealt directly with debt or distressed securities that much, but I’m very interested in your investment strategy and I’ve done some value investing of my own. I want to get into it, and I’m a quick learner.”

Since I had that experience to point to and since I had transitioned over from a non-finance background (I completed a technical major in college), they believed my story.

The investment ideas you pitch in interviews are also huge for demonstrating your interest, so you need to match those to the fund’s strategy – but we’ll get to that in the next set of questions on recruiting.

Hedge Fund Recruiting: Got Interviews?

Q: So it sounds like you don’t even necessarily need distressed investing experience to break into a distressed hedge fund.

Do they care about whether you have investment banking experience? Or does it depend on the fund type and strategy?

A: As you just suggested, it depends greatly on the fund type and strategy.

At a small fund (defined as one with around or under $100MM USD in assets under management), you can sometimes break in with no previous investment banking or finance experience if you sound impressive, have good ideas, and know what you’re doing. You might be able to break into a fund like that by following the CFA route.

At bigger funds ($800MM+ USD in AUM), usually you need investment banking experience – especially at any funds that invest in public equities / debt, and at any merger arbitrage funds.

If you’re interested in global macro funds – places that trade based on macroeconomic indicators like GDP growth, inflation, FX rates, and so on – you don’t necessarily need banking experience, but you might need asset management, hedge fund, or trading experience.

And then if want to get into the “elite” hedge funds – places like Bridgewater or Soros – you probably won’t be able to break in at the entry-level (at least on the investment team) at all.

Technically, Bridgewater does have an undergrad program but the Founder runs the show and you don’t really contribute much anyway.

They’re looking for genius investors who have achieved unbelievable returns, or extremely experienced investors from existing firms; it’s rare for them to even hire someone with only a few years of experience, at least if that someone is deciding on investments.

You need to tell your story well and make sure you fit in with everyone there. Most hedge funds – even the ones with above $1 billion USD in AUM – are still extremely small and might have fewer than 10-15 investment professionals total.

You may get brain teaser and math questions, but I did not encounter too many of them in my interviews. They might be more common at prop trading firms, or maybe at hedge funds that focused on something other than value investing.

Q: OK, so let’s pause right here and take a step back: you mentioned earlier that matching your investment ideas to the fund’s strategy is important.

But you didn’t have distressed experience and knew almost nothing about it, so what ideas did you pitch?

A: Again, I just focused on value investing rather than picking a distressed idea specifically.

So I pitched technology companies that I thought were undervalued, and used the following 3 points when pitching them:

The Macro Side – What’s the industry doing? Is it growing faster/slower than others? How is it related to the economy as a whole?

The Company’s Operations – What do they do? How do they make money? What does their future look like?

Peer Comparison – How do they compare to competitors? Is anyone doing better in terms of growth or margins?

I drew up a list for the companies I picked and made sure I could point to something favorable for each one of those.

I would recommend using the same structure for any company you pitch to a value-oriented fund, and keeping your pitch brief – go on for 5 minutes and they’ll fall asleep.

Q: Right, that’s great advice. Pitching stocks is similar even in equity research interviews, but you linking your ideas to the fund’s strategy is crucial when you’re interviewing with hedge funds.

A: They didn’t come up at all. Almost no one at my fund even has the CFA, and pretty much everyone here is a former banker.

Once again, a lot of it comes down to the hedge fund’s strategy – many value-oriented funds hire former bankers, and those former bankers have neither the time nor the need to get the CFA (since they already know the relevant topics).

But if it’s a fund that uses a different strategy or that hires former equity research analysts or portfolio managers, maybe the CFA would be more common.

Q: That makes a lot of sense. So if you’re following the IB to HF path, the CFA doesn’t sound terribly useful.

Let’s move into what you do on the job: what exactly is distressed investing, and how does the process work from beginning to end?

A: Wait, isn’t that what’s coming up in part 2?

Q: Good point… until next time.

Stay tuned for Part 2 of this interview, where we go into how distressed investments work, the job itself and the hours / lifestyle, and the all-important issue of pay.

Comments

Hi I am applying to a boutique bank and the person I spoek with wants me to send them a sample financial model.. Would anyone on here haev any idead what that would entail? A full-scale valuation of a company or something smaller?

Hey Brian thank you for responding. Well I just got your BIWS (All courses) Platinum package via Jobs Digest so hopefully I can get this done and rep M&I to the fullest!! Running through all your videos a la Barry Sanders through defenses in his prime.

I think the case studies of recent deals in the course (J Crew, Ralcorp / ConAgra, etc.) would be the best to send over in terms of models since they’re easily understood and show off exactly what you’ve learned.

Brian, the bank focuses on Media and Tech M&A I was actually leaning towards using the Apple video (Accounting Fundamentals) as sort of a template to follow.
As for the (J Crew, Ralcorp / ConAgra, etc.) case studies will I find that through the seminar that you did with Jobs Digest or should they be with my BIWS material?

BRIAN. WOW got an interview with a BB and wondering if there is anything specific I should be looking at, since I am coming from a Non Target… Should I bring the model I created for the boutique that I mentioned above or would that tempt them to ask more advanced questions… (thank god for your Premium package)

Yes, macro funds tend to take more people with direct experience i.e. traders. There are exceptions and doing banking won’t necessarily kill your chances but may make it more difficult. I’m not 100% certain on the activist funds, but distressed and long/short equity tend to take more from banking and ER.

I have been following your website for over a year and have found it to be very informative and diverse.

PE firms and value-oriented hedge funds tend to focus on a very stringent fundamental analysis for investment decision making. However, investment bankers and traders are ‘perhaps’ not as equipped to perform such underlying earnings analysis as are the transaction services guys at a big CA firm. As a TS senior associate, I have had the opportunity to work on multi-billion dollar deals under the supervision of of course different senior directors, to not only uncover the true value drivers of the companies, but to also challenge some of the growth assumptions assumed by the buy-side or the investment bankers pitching these investments. With this experience, couple with my interest in investing, I am confident of doing as good a job at a HF as an investment banker from a top shop. Still, for some reason, I wouldn’t stand a chance of getting an interview if the HF were to pick one of us.

I can’t seem to wrap my head around why IB guys are preferred in the PE and HF world over TS guys.

I think it’s mostly because the perception is that TS guys are not used to the pressures and the horrible lifestyle you get in finance (even at HFs… still long hours, and it’s a different kind of stress).

So, sort of stupid on that one but that is how a lot of HF/PE people think and why they tend to recruit bankers more often.

Amortization is sometimes used interchangeably with Depreciation but they mean the same thing. Sometimes companies just list it as “Depreciation & Amortization of PP&E” or something similar. Technically Amortization should only apple to intangible assets but sometimes people use it to mean depreciation as well.

The basic rationale is that everything is linked to revenue at some level, since expenses are usually a % of revenue and balance sheet items are %s of income statement items, which are all percentages of revenue as well.

The more detailed explanation is that items like inventory, accounts receivable, and so on are most likely linked to revenue because as a company sells more, it needs to order more inventory and it is waiting on more customers to pay in cash. Prepaid expenses and such are linked to income statement expenses, but those are also a % of revenue.

And then on the other side, current liabilities items such as accounts payable and accrued expenses are also linked to income statement expenses, which are once again a % of revenue.

So ultimately everything goes back to revenue, which is why you can estimate the change in working capital as a percentage of revenue.

Look at what it has been historical and take an average of that percentage. So if the average change historically has been 3% of revenue, you would use that; if it’s negative 4% of revenue, you would use that.

Some companies’ working capital needs grow as their revenue grows, whereas for others it’s the opposite. It depends on the business model.

What is your advice to someone in BB IBD who is certain that they want to be an investor but is unsure about where they want to do it: PE, HF (distressed debt, credit, event-driven, long-short equity, etc.).

Would you recommend to just do PE because it leaves the most doors open?

Many thanks for the very useful article. I want to move into hedge funds / value investing and am currently a second year analyst at a MM bank. I have two questions:

1. I am in London. Does anyone know how the process differs here? Do you know any London recruitment firms that specialise or do hedge fund recruiting? I checked out the ones mentioned in this article, and they are all US focused.

2. How much of a disadvantage am I at by being at an MM bank? I am in an industry coverage group (utilities). All the opportunities I get contacted about are infrastructure private equity, and i am not sure whether i want to do private equity, especially not at a large infrastructure fund where the hours could be as bad / worse than banking.

1. It is not that different in London as firms still look for the same qualities. Language skills are more important there and you have a big advantage if you know multiple European languages. On the recruiting firms involved, I’m not sure but perhaps someone here can comment on it.

2. Depends on the firms you’re targeting. You don’t have a great shot at mega-funds, but you have a good chance of moving to small to mid-sized PE firms and hedge funds.

I’m really interested in Bridgewater Associates for its unique culture and investing strategy. Although I heard that Bridgewater recruits from undergrad for certain schools, I don’t go to one of those targets.

I’m a sophomore right now, and my school is a target for a lot of banks and funds, but not Bridgewater. What could I do to raise my chances of getting a sophomore summer internship? I’m planning on reaching out to a couple of alumni I found on Linkedin.

Your best bet is to keep networking with alumni and ask for referrals to people in the HF world at the end of each conversation. I would recommend going through email rather than LinkedIn if you can get the alumni email addresses from your database. Also, I wouldn’t necessarily just focus on places like Bridgewater… even a tiny HF is a good place to start and can result in offers at bigger firms in the future.

If I think that in the future I want to work in a macro or value investing hedge fund, would you suggest that I try to break into a hedge fund (probably not Bridgewater-calibre from the looks of it) out of undergrad, or go the 2 year i-bank analyst route first?

I understand that HFs look for top Analysts. How do they (or the headhunters) know how you rank in your Analyst class?

Also, if you work on creditor-side restructuring deals, do you think it would be possible to make a good impression on a client and hope that you get recruited by that firm? Or do clients never poach talent from their advisers?

Meh, I know you really don’t like the CFA, but for most value-oriented funds it is important and can be a big differentiator between candidates. Obviously this was not the interviewee’s experience, but I wouldn’t extrapolate that over the entire value fund universe. I work at a $2BB AUM value fund and every partner has the CFA.

It’s just like an MBA, IB experience, etc. Can you make it to the buy-side without these? Sure. But your odds certainly increase by having them on your resume.

I am going into equity research but am interested in working at a HF down the road. If you could post a blog about what types of HFs hire from equity research or maybe suggest where I can figure this out, that would be great!

I think it depends what the hiring manager is looking for. Readers may be able to add more suggestions, but I think ER experience is useful to most research analyst roles at a HF. http://www.mergersandinquisitions.com/hedge-fund-recruiting/ If you used to work for strategy research, I believe this experience will be more useful to global macro funds. Depending on the sector you cover, your skills may be more useful to some sector-specific funds. We don’t have a blog on the above, and I’ll reflect your opinion to the team.

Considering the recent scandals many of the bulges (if not all) have gone through post-2008 recession, would you say the hype about going for BBs only has died quite a bit? It seems like in terms of pay, bonuses, and experience that smaller firms (ex. Centerview, Qatalyst, Guggenheim, Evercore, Greenhill) might be the place to be for the next few years. Would you agree?

Also, would being at these smaller firms still be disadvantage for headhunters for hedge funds?

I don’t think the hype will ever “die” but maybe they’re not as great as they once were. Smaller firms have their advantages but the biggest HFs and PE firms will still tend to focus on large banks for their recruiting efforts.

Brian,
The interviewee had mentioned that they worked at a small value firm during their undergrad years. Do you know the name of this firm and/or the name of some other value firms that are in the $100 mil asset range?
Thanks,
Mark

I don’t know the name of the fund because I never ask for that information when conducting interviews. It was several years ago so it may not even exist anymore – funds come and go very quickly. There are probably hundreds of funds in the $100M AUM range and your best bet is to do a Capital IQ search for them to get information that’s professionally updated and maintained.

Considering I am a currencies trader for a really small investment firm, I would imagine I would fit in mostly with a global macro fund. Do you have any advice on what topics I should brush up on when preparing for an interview. I am guessing modelling is not a top priority here (but I could be wrong). Any links would be helpful. Also, for a case study, would I simply outline a strategy I use or am researching including a comprehensive VAR analysis.